Sylvania Platinum — New Thaba JV adds significant value

Sylvania Platinum (AIM: SLP)

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Research: Metals & Mining

Sylvania Platinum — New Thaba JV adds significant value

Sylvania Platinum (SLP) has announced a 50:50 joint venture (JV) with Limberg Mining Company (LMC), called Thaba, to process platinum group metals (PGM) and chrome ores from LMC’s historical tailings dumps and run-of-mine (ROM) ore. It is expected to start production in H225 and will for the first time see Sylvania receiving a chromite concentrate revenue stream on its own account. Sylvania is investing US$32m in capital expenditure and US$5m in working capital from its large cash resources (of which 50% is a loan to LMC to be paid back from JV cash flow after production commences) in exchange for c 6,500koz of forecast PGM and 200kt of chrome concentrate production pa over 10 years. We value Sylvania’s 50% share of the JV at 17.2p/share, resulting in a 29.5% increase in our total valuation to 135.4p/share.

Metals & Mining

Sylvania Platinum

New Thaba JV adds significant value

Valuation update

Metals and mining

29 August 2023

Price

66p

Market cap

£174m

US$1.28/£; ZAR17.71/US$

Net cash (US$m) at 30 June 2023

125

Shares in issue

263m

Free float

88.2%

Code

SLP

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.1)

(19.5)

(18.0)

Rel (local)

(1.5)

(16.4)

(16.4)

52-week high/low

112p

65p

Business description

Sylvania Platinum focuses on the re-treatment and recovery of platinum group metals including platinum, palladium and rhodium, mainly from tailings dumps and other surface sources, but also lesser amounts of run-of-mine underground ore from Samancor chrome mines in South Africa.

Next events

FY23 results

September 2023

Analyst

René Hochreiter

+44 (0)20 3077 5700

Sylvania Platinum is a research client of Edison Investment Research Limited

Sylvania Platinum (SLP) has announced a 50:50 joint venture (JV) with Limberg Mining Company (LMC), called Thaba, to process platinum group metals (PGM) and chrome ores from LMC’s historical tailings dumps and run-of-mine (ROM) ore. It is expected to start production in H225 and will for the first time see Sylvania receiving a chromite concentrate revenue stream on its own account. Sylvania is investing US$32m in capital expenditure and US$5m in working capital from its large cash resources (of which 50% is a loan to LMC to be paid back from JV cash flow after production commences) in exchange for c 6,500koz of forecast PGM and 200kt of chrome concentrate production pa over 10 years. We value Sylvania’s 50% share of the JV at 17.2p/share, resulting in a 29.5% increase in our total valuation to 135.4p/share.

Year
end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

06/22

152

81

20.6

10.3

4.1

15.6

06/23e

134

67

18.1

8.0

4.7

12.1

06/24e

114

39

10.6

3.6

8.0

5.5

06/25e

137

49

13.0

4.6

6.5

7.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong long-term earnings upside

As a result of the Thaba JV, we have made upward adjustments to our EPS forecasts for FY24 and FY25. In addition, we have incorporated higher net interest income, allowing for the impact of higher interest rates on Sylvania’s cash balance, even including estimates for the JV-related capital outflows. The increase in interest income, combined with interest on the LMC loan and proportionate consolidation of the JV, has resulted in a 16% increase in our FY25 EPS forecast to 13.0c. However, with the JV moving into full production in FY26, we forecast 29% growth in FY26 EPS. We expect the JV to contribute 13.7% of Sylvania’s EBITDA in FY26 and see this contribution increasing over time due to our expectations of a reduction in production levels at Sylvania’s current operations over time.

Valuation: 29.5% uplift to 135.4p/share

We value Sylvania at 135.4p/share, up from 118.2p/share previously. Our valuation for the company’s producing assets is unchanged at 104.4p/share, as is our exploration asset valuation at 13.8p/share. We value the JV at US$115m and Sylvania’s share at 17.2p/share. The increase in the valuation is driven by the additional c 9% PGM production and 200kt a year of metallurgical-grade chromite using a mine gate price of US$102/t. We take a conservative view in our chromite assumptions for valuing the JV. Current spot prices at mine gate of US$200/t are historically high. Pre-2020, these prices were around US$150/t. If chromite prices continue to stay at current levels or fail to fall to US$102/t when production starts in H225, this would present upside to our valuation.

JV agreement

Sylvania has entered into a JV agreement to process PGM and chrome ores from historical tailings dumps and ROM ore from the Limberg Chrome Mine, located on the northern part of the western limb of the Bushveld Complex in South Africa. The JV will trade and operate as Thaba. The Thaba JV represents a major step in the delivery of Sylvania’s growth strategy and is a significant step forward for Sylvania in expanding its operations and leveraging its expertise in the recovery of chrome and PGM concentrates, adding attributable annual production of c 6,500 4E PGM ounces and introducing 200,000 tonnes of chromite concentrate to Sylvania Metals’ existing annual production profile over 10 years.

Important points of the JV are:

Sylvania Metals has entered into a 50:50 JV agreement to recover chromite and PGM concentrates from ROM ores and historical tailings deposited in the Tailings Storage Facility at the Limberg Chrome Mine.

New processing infrastructure will include a new secondary fine chromite and PGM beneficiation plant.

Sylvania Metals will share equally in both the PGM and chromite concentrate revenue and it is estimated by the company that the Thaba JV will produce approximately 13,000 4E PGM ounces (approximately 15,500 6E PGM ounces) and 400,000 tonnes of metallurgical grade chromite concentrate per year over the initial 10 years of the JV, which the parties may negotiate to further extend.

The Thaba JV will increase forecast annual production of 4E PGM ounces by approximately 9% and add chrome to the company’s commodity portfolio.

The capital and establishment costs (‘upfront capex’) of the Thaba JV of approximately ZAR600m (c US$32m) will initially be funded by Sylvania Metals from its existing cash resources. The initial working capital facility required by the Thaba JV following commissioning will be advanced by Sylvania Metals (c US$5m).

Sylvania Metals will manage the Thaba JV on behalf of the partners who will collectively apply their respective PGM and chrome expertise to maximise recovery efficiencies and production.

The project execution phase will be 18–24 months, with first production expected in H225.

The attractive investment return indicated on the Thaba JV exceeds the company’s internal rate of return hurdle rate of at least 20% per annum and has a cash pay back within three years of commissioning, based on current long-term consensus pricing.

It will be the first PGM beneficiation facility on primary chrome ore and tailings on the northern part of the western limb of the Bushveld Complex and will be an enabler for further growth opportunities in the region.

The chromite market: Taking a conservative view

Chromite is used in the manufacture of ferrochrome, which is used in turn in the production of stainless steel. The main market for South African chromite is China. Prices of chromite are reported on a cost, insurance and freight (CIF) basis, which means the seller is responsible for covering the costs, insurance and freight of the buyer’s shipment while in transit, and is paid at the buyer’s port. Prices for South African chromite vary depending on the chrome content of the ore. The JV will be delivering concentrate with 40% to 42% chrome content. Current chromite prices are c US$280/t CIF for the 40% to 42% ore (Exhibit 1). This price will include the rail or road transport cost from the Thaba JV plant in north-western South Africa to a port like Richard’s Bay. We assume this would cost c US$43/t and c $7/t in port fees, totalling c US$50/t. The shipping cost from a port in South Africa to a port in China is c US$20/t, plus c US$10/t marine insurance, totalling US$30/t. Hence the mine gate price that SLP would currently receive is around c US$200/t (ie the current CIF price of US$280/t minus US$50/t (free on board, FOB) minus US$30/t CIF adjustments).

Exhibit 1: Historical illustrative South African chromite concentrate (42% Cr2O3) CIF price

Source: Sylvania Platinum

Chromite prices have been trading over US$200/t CIF since January 2022 and are currently at around US$280/t. However, from 2013 to 2021, CIF prices averaged around US$180/t. Hence, taking off the c US$80/t transport and freight costs we have indicated above, we have used US$102/t at mine gate in our valuation, a price that is the same as SLP used in its base case assessment of the value of the JV.

Valuation

The Thaba JV adds 29.5% to our valuation for Sylvania. Our value for Sylvania’s producing assets remains at 104.4p/share, while we continue to value the exploration assets at book value of 13.8p per share. We value the JV at US$115m (17.2p/share for Sylvania), resulting in a total valuation for Sylvania of 135.4p/share.

Valuation of Thaba JV: 17.2p/share

Edison values operating mining resources companies at a 10% real discount rate based on the dividend discount model (DDM), allowing for a constant currency approach to forecasts.

Our longer-term forecasts used in our DDM allow for maximum supportable dividends towards the end of our explicit forecast period (FY40), which results in a 100% payout ratio in FY40 and implied thereafter.

The key driver of our valuation is Thaba’s ability to pay dividends, which we have forecast to commence in FY28. This is supported by a healthy and growing cash balance, which we forecast to reach US$38m by FY28, and we forecast earnings to rise from US$8.8m in FY26 to US$9.8m in FY28. The valuation presents upside if a higher pay-out ratio occurs during earlier years.

Our valuation for the JV is US$115m or £90m at the current exchange rate. Sylvania’s 50% share of the valuation is worth 17.2p/share. Our valuation assumes an FY26 earnings multiple of 10.7x.

Financials

In our 3 August 2023 report (Lower rhodium prices overshadow strong production), we moderated our forecasts for Sylvania, largely on the back of lower rhodium prices and the rhodium price outlook. The Thaba JV presents new upside potential for Sylvania, which we have included in our forecasts and has a meaningful impact for Sylvania in FY26 in particular, when we forecast 30% growth in EPS.

Thaba JV earnings forecast to rise to US$8.7m in FY26

Exhibit 2 below includes our three-year forecasts for the Thaba JV, including production (guided by the JV announcement and management), our price forecasts and revenue, our operating cost forecasts and the resultant bottom line, include forecast earnings of US$8.8m in FY26.

The JV is to be funded by a capital injection from Sylvania for 50% of the start-up costs and working capital, with the residual being funded by a loan from Sylvania to LMC, which will then inject it into the JV. The loan is forecast to be fully repaid by FY35 via equal instalments, starting in FY26, with interest earned positively affecting Sylvania’s financial results.

Capital expenditure of US$32m will be incurred evenly over the next two years.

The JV is planned to start production in H225 with the first year of full production in FY26. Fifty percent of PGMs and chromite produced will be attributable to SLP.

The PGM plant feed grade is forecast by SLP to be 3.91g/t (the mined chromite plant feed grade will be lower), which translates into a conservative 42% recovery. Total 4E produced is estimated at 13,000oz with 6E at 15,500oz. Half of this production will be attributable to Sylvania, which currently produces 4E of 75,000 oz. Over time and outside of our explicit forecast period, we project an increase in recovery, trending towards the +50% achieved in Sylvania’s current operations.

Recoverable chromite of c 400,000t pa for the JV will see Sylvania for the first time having chromite as a saleable product. The mine gate chromite price assumption of US$102/t is conservative in our view as current prices are in the region of US$280/t CIF.

Exhibit 2: Thaba JV* financials forecast, on a 100% basis

 

FY24e

FY25e

FY26e

FY27e

FY26e vs FY25e

FY27e vs FY26e

Production

 

 

 

 

Total milled (t)

0

198,000

792,000

792,000

300.0%

0.0%

PGM plant feed grade (g/t)

3.91

3.91

3.91

3.91

0.2%

0.0%

PGM plant feed (t)

0

61,500

246,000

246,000

300.0%

0.0%

PGM plant recovery (%)

42.0

42.0

42.0

42.0

0.0%

0.0%

Total 4E PGMs (oz)

0

3,250

13,000

13,000

300.0%

0.0%

Total 6E PGMs (oz)

0

3,875

15,500

15,500

300.0%

0.0%

Recoverable chromite (t)

0

99,000

396,000

396,000

300.0%

0.0%

PGM basket price ($/oz)

1,938

1,996

2,029

2,070

1.7%

2.0%

Chromite price ($/oz)

102.0

102.0

102.0

102.0

0.0%

0.0%

Financials (US$m)

4E Revenue (US$)

0.0

5.1

20.6

21.0

306.8%

2.0%

2E Revenue (US$)

0.0

0.3

1.4

1.4

311.5%

4.2%

Chromite revenue (US$)

0.0

10.1

40.4

40.4

300.0%

0.0%

Total revenue (US$)

0.0

15.5

62.4

62.8

302.5%

0.8%

Total operating costs (ZAR)

0.0

193.4

773.8

773.8

300.0%

0.0%

Total operating costs (US$)

0.0

10.3

41.3

41.3

300.0%

0.0%

Royalties tax (US$)

0.0

0.8

3.1

3.1

302.5%

0.8%

Other costs (US$)

0.50

0.50

0.50

0.50

0.0%

0.0%

EBITDA (US$)

(0.5)

3.9

17.5

17.9

347.7%

2.6%

Net profit (US$)

(0.5)

0.5

10.7

11.0

N/A

3.0%

Gross margin

N/A

11.4%

24.6%

25.1%

116.4%

2.2%

Capex (US$m)

22.0

10.0

0.0

0.0

(100.0%)

N/A

Cash balance (US$m)

14.5

7.7

21.0

34.7

173.7%

65.0%

Average ZAR/US$ rate

18.75

18.75

18.75

18.75

0.0%

0.0%

Sylvania EBITDA ex. JV (US$)

37.4

47.7

55.2

58.7

15.7%

6.3%

50% of JV EBITDA (US$)

(0.3)

2.0

8.7

9.0

347.7%

2.6%

Sylvania EBITDA including JV (US$)

37.1

49.7

63.9

67.6

28.7%

5.8%

JV EBITDA contribution

-0.7%

3.9%

13.7%

13.3%

Sylvania EPS including JV (USc)

10.6

13.0

16.8

17.6

29.1%

4.5%

Source: Edison Investment Research, Sylvania Platinum. Note: *Sylvania owns 50% of the JV.

We forecast US$15.5m in revenue during FY25, based on one quarter of production, which then ramps up to US$62.4m in FY26. Thereafter we assume production levels are maintained at the FY26 levels, although we assume revenue (outside of our explicit forecast period) benefits from higher 4E recovery.

Operating costs are based on a total operating cost of ZAR977/t (guided by SLP) and a treatment rate of ore of 66,000 tons per month, giving an annual operating cost of ZAR773.8m. This should be improved upon but we have used this cost over the life of the JV.

Royalties are formula based and depend on the profitability of the operation, but average around 5% of revenue or about US$3.1m. At start-up, these are close to zero but increase to a maximum of 5% as full production is reached provided that the operation is profitable.

Gross margin is conservatively forecast at 24.6% in FY26, but would be as high as 40% if current chromite prices were to persist. We forecast a small profit of US$0.5m in FY25, followed by US$10.7m in profits in FY26.

By FY26, we forecast that Sylvania’s 50% share of the JV will contribute 13.7% to its combined EBITDA, reducing to 13.3% in FY27 due to rising PGM basket price forecasts. Over the longer term, this contribution is forecast to increase driven by higher JV recovery and falling production in Sylvania’s current operations as dump operations reach end of life (from FY33, we forecast that the JV will contribute 35% of Sylvania’s EBITDA).

Sylvania forecasts have been lifted

Exhibit 3 shows our financial forecasts for Sylvania, including its 50% stake in the Thaba JV. We have lifted our FY24 and FY25 earnings because of more aggressive interest income assumptions for Sylvania from two sources. Firstly, we have incorporated higher interest income due to the currently prevailing high interest rates on Sylvania’s cash balances. Secondly, due to Sylvania’s loan to LMC (currently attracting a 11.75% pa interest rate), the inclusion of the JV has further enhanced our interest income forecasts. The combined impact of these changes, plus a proportionate consolidation of the JV, lifted our earnings forecasts by c US$6m pa from FY24 to FY26. As a result, we have increased our FY24 EPS forecast by 18% to 10.6c and our FY25 forecast by 16% to 13.0c.

We understand that the Thaba JV will be accounted for by Sylvania using proportional consolidation, which means the addition of 50% of each relevant JV line item as per Exhibit 2 to each relevant line item as per Exhibit 3 below. The JV is forecast to go into full production in FY26, driving a 22.5% increase in Sylvania revenue (allowing for its 50% of the JV production). After allowing for the associated JV cost and other increases, our FY26 EPS has been lifted to 16.8c, which represents 29% growth on the FY25 base.

Exhibit 3: Financial summary

US$m

2021

2022

2023e

2024e

2025e

2026e

Year ending 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

206

152

134

114

137

168

Cost of Sales

(55)

(62)

(64)

(74)

(84)

(99)

Royalties Tax

(8)

(7)

(4)

(6)

(7)

(8)

Gross Profit

143

83

66

35

46

61

EBITDA

145

83

66

37

50

64

Operating Profit (before amort. And except.)

142

80

62

32

43

57

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Other

(5)

(7)

(8)

(9)

(10)

(10)

Operating Profit

142

80

62

32

43

57

Net Interest

1

1

5

7

6

7

Profit Before Tax (norm)

143

81

67

39

49

64

Profit Before Tax (FRS 3)

143

81

67

39

49

64

Tax

(43)

(25)

(19)

(11)

(15)

(20)

Profit After Tax (norm)

100

56

48

28

34

44

Profit After Tax (FRS 3)

100

56

48

28

34

44

Average Number of Shares Outstanding (m)

272

272

263

263

263

263

EPS – normalised (c)

36.7

20.6

18.1

10.6

13.0

16.8

EPS – normalised fully diluted (c)

35.9

20.4

18.1

10.6

13.0

16.8

EPS – (IFRS) (c)

35.9

20.4

18.1

10.6

13.0

16.8

Dividend per share (p)

4.0*

8.0*

8.0

3.6

4.6

5.3

Gross Margin (%)

69%

55%

49%

30%

34%

36%

EBITDA Margin (%)

70%

54%

50%

33%

36%

38%

Operating Margin (before GW and except.) (%)

69%

52%

46%

28%

31%

34%

BALANCE SHEET

 

 

 

 

 

 

Fixed Assets

86

93

101

151

157

159

Intangible Assets

45

46

47

47

47

51

Tangible Assets

40

46

54

65

68

67

Investments

0

0

0

39

42

41

Current Assets

188

187

181

156

176

180

Stocks

4

4

3

2

2

3

Debtors

69

53

44

38

43

45

Cash

106

121

125

108

122

128

Other

9

8

9

9

9

5

Current Liabilities

14

11

9

8

9

9

Creditors

14

11

9

8

9

9

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

16

18

23

22

23

24

Long term borrowings

0

0

0

0

0

0

Other long-term liabilities

16

18

23

22

23

24

Net Assets

244

251

250

278

301

306

CASH FLOW

 

 

 

 

 

 

Operating Cash Flow

114

92

75

43

45

62

Net Interest

2

2

5

7

7

7

Tax

(47)

(24)

(19)

(11)

(15)

(20)

Capex

(8)

(16)

(15)

(16)

(10)

(6)

Other investing activities

0

0

0

(19)

0

2

Financing

(4)

(20)

(0)

0

0

0

Dividends

(20)

(23)

(36)

(18)

(11)

(40)

Net Cash Flow

39

20

20

(14)

16

7

Opening net (debt)/cash

56

106

121

125

108

122

HP finance leases initiated

0

0

0

0

0

0

Other

12

(5)

(16)

(4)

(2)

(1)

Closing net (debt)/cash

106

121

125

108

122

128

Source: Company accounts, Edison Investment Research. Note: *Normal dividend.


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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Riverstone Credit Opportunities Income — Continues to benefit from healthy yields

Riverstone Credit Opportunities Income (RCOI) reported an H123 NAV total return (TR) of 4.1%, with all loan investments in its portfolio performing to plan (also with respect to key sustainability performance indicators embedded in the loan terms). In June 2023, RCOI participated in the refinancing of the Streamline Innovations loan, which allowed it to realise a gross internal rate of return (IRR) of 23.6% and multiple on invested capital (MOIC) of 1.29x on the original US$13.8m loan (after a holding period of 13 months). RCOI reinvested US$9.9m into a new loan to Streamline Innovations, with an estimated all-in yield to maturity of 13%. It declared a quarterly dividend of 2.0 US cents per share (in line with the previous quarter). At the current c 17% discount to NAV (including income), the last 12-month (LTM) payment now implies a c 10% dividend yield.

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